2010/09/18

The Grand Strategy of Germany (FRG)

The Grand Strategy of the Federal Republic of Germany was coined by the conservative-dominated coalition governments of Konrad Adenauer (1949-1963) and only slightly modified by later governments.

The two core components of the Grand Strategy were and are

(1) A "social market economy". This is a kind of tamed capitalism with regulations and social insurances that allows both for economic prosperity and social peace. It was an evolution with roots that reached back to the late 19th century and into social theology. This economic model was closely linked to the minister and later chancellor Ludwig Erhard.

(2) An integration in (and reconciliation with) the West. This was somewhat similar to the foreign policy of the Stresemann era (1923-1929), but more ambitious. The purposes were initially the regaining of as much sovereignty as possible and to prevent future wars, but the West's defence against the Moscow-led Eastern Europe and the pursuit of additional prosperity through the European cooperation became later main motivators.

The social-democratic-liberal governments (1969-1982) added improved relations with Eastern neighbours and with Moscow to the mix, albeit on a much smaller scale than the Western integration, which had at that time already proceeded towards the European Unification process.

The German Re-unification of 1990 and the general end of the Cold War around that time allowed for an extension of the cooperative strategy (2) to Eastern Europe.

Meanwhile the economic stress of subsidizing the economically weak Eastern Germany, late effects of immigration, effects of industrial structural change since the mid-70's (loss of skill industry jobs) and demographic change caused increasing problems in the social market economy since the 1990s.

The Schröder government 1998-2005 saw the need to reform Germany for better competitiveness and made the "social net" less comfortable, but this and the European Monetary Union were likely unnecessary and in combination caused extreme trade imbalances in Europe (=the European equivalent of the imbalance between East Asia and the U.S.).

The present domestic economic situation and structure isn't satisfactory. Years of marginal real wage growth have boosted the competitiveness of our industry so much that job losses were small even during the ongoing global economic crisis, but the resulting weakness of domestic consumption caused social and Europeanproblems (unemployment and erosion of the middle class, very large trade imbalances).

The post-Cold War period also saw the first and then an escalating use of the German military in so-called "out-of-area" missions.

The original purpose of the Bundeswehr was to serve as a component of the Western integration strategy. The Adenauer government promised 12 army divisions for the West's defence in Central Europe (of an allied total of 26) and regained much sovereignty for it.

The foreign and security politicians of the post-Cold War period were apparently bored without a clear defence objective and Germany became engaged in such "out-of-area" missions. This was at least after the first years part of a strategy to gain a permanent UNSC seat for the unified and thus enlarged Germany. This was apparently given up, while the "out-of-area" missions continue for no real strategic purpose. The missions are sometimes supposed to be linked to the Western integration strategy (especially to giving NATO a purpose after the Cold War, thus keeping this stabilizing institution intact), but it's questionable whether they're necessary for the officially defensive NATO and EU. To the contrary; the partially militarized foreign policy could be a risk factor for the old integration-oriented national security strategy.

As of today, the basic Grand Strategy of the 1950's is still in effect.

We do still strive for close cooperation with European countries instead of thinking of (violent) confrontation as a promising foreign policy approach.

We are also still fans of the social market economy, although it's been obvious for about a generation that we didn't keep it in a good shape. Social, fiscal and trade imbalances seem to become increasingly serious and the advancing demographic change (continuous shift to a smaller working age population share) is adding ever more pressure on it.

It's about time for reforms, albeit not necessarily for a new grand strategy.

The last social-democratic Chancellor was rather "misled", the later grand coalition was unable of major reforms and the current conservative-liberal government seems to mix a degree of incompetence with a typical conservative inability of reform which can apparently only be overcome when Germany is reduced to rubble.

An additional problem is that the present chancellor was good at making a political career and destroying political enemies, but is poor at leadership and management.

Germany has to wait for the next reform-capable government. Let's hope that the discussions will in the meantime open the eyes for the existing serious challenges and yield many good reform ideas.

I disagree, a new Grand Strategy is exactly whats required.The Social Market Economy has failed, both in its efforts to create an egalitarian meritocracy where all are equal, and in maintaining the economic growth of a market economy. I dont have my magic spreadsheet at home, but German share of world GDP has fallen from about 9-8% to 6-5% and wage growth for the past decade has been none existant.Reconcilliation with the west has been achieved, integration may be popular with the political elite as a method of bypassing those pesky voters, but its not clear even the German voters are happy about it.

Economic Policy isnt working and foreign policy is either completed or unpopular.

No alternative system has a substantially better record on "meritocracy" and social effects, there's little reason to give up a system that's so strongly rooted in today's German society.

World GDP share is irrelevant and I cannot tell which start date you're using, for it's obviously not 1949. The relevant metrics are different, such as GDP per capita or even better GDP/workforce. Germany is 2% better than the UK in this metric and has a trade balance surplus instead of deficit.

The economic problem is mostly a political problem in my opinion; the conservative pro-employer government of 1982-1998 was followed by a strange supposedly social-democratic pro-employer government in 1998-2005 and then again by pro-employer governments under conservative Merkel. The system is out of balance because we've added weight only to one side for a generation. There was no policy for higher work incomes because of a serious lobbying power asymmetry.

The prosperity of Germany doesn't deteriorate if some Third World Country becomes rich. "Share of world something" does therefore not make sense as prosperity metric.There is a metric imaginable which describes the technological limit of GDP/working age population, but such a metric is hard to come by and the GDP/working age population is high enough to prove that the wealth isn't the problem, but the distribution is nevertheless unsatisfactory.

@Norman: We should shed some myths, some PC and some career politicians and then we should build up pressure for effective reforms. Our governments administer too much and aren't ambitious enough. There's also too influential corporate lobbyism (RWE, Deutsche Bank, farmers, carmakers) that needs to be pushed back.

The key challenge is to set the lower class youth on a path to a good job education - the beginning skilled workers shortage is a great opportunity to get rid of the unemployment.Sadly, politicians seem to be more intent on countering this shortage with immigration and a higher retirement age instead.

I would suggest that future reforms should comprise a restructuring of the taxes social insurances. The current system does tax only the industrial workers and service employees, but not managers, civil servants or self-employed persons, so every middle-class job is taxed by approximately 40%. That's a really bone-crushing for small companies and middle-class families. The lower salaries are staying down because companies dodge the government limits from which on the social insurance fees have to be paid.

The jobs the lower class youth you mentioned will be kept in hire-and-fire contract jobs to avoid again the social insurance fees.

By making the tax system more fairly the social market economy would have a second chance. The current system is still like thus designed by Otto von Bismark in the 19th century. Otherwise it is likely to implode because of the demographics.

The public servants have rather low salaries, it would be pointless to rise their salaries to normal in order to transfer the raise to the social insurances instead of simply keeping the money and the pension system.

Self-employed persons and persons earning very much have to pay much more to their health insurance in their 50s than others and those with good income have to pay much income tax. Taxes are quite often used for transfers to some social insurances.

A VWL professor of mine once said that by redistributing and subsidizing in a thousand ways we prevent transparency and thus democratic control of the whole effort. We should simply focus the income/wealth adjustment effort on income and death taxes to keep it simple. I agree with him.

I do furthermore think that the demographic problem isn't nearly as bad as some pretend, and even more importantly; there's no real way out, no matter how much we care about it. We will simply get used to the very slow (decades) structural change and increasing transfer necessities.